29
Dec 2011

Strategic Defaults – Thoughts

By admin

Yesterday on Housingwire.com, Kerri Panchuk wrote a piece on Foreclosure Litigation and Strategic Defaults.  Some of the article is quite alarming and only further signifies that we are far from out of the deep end.

Original Article

…more borrowers learned to lean on strategic default, choosing to walk away from distressed or underwater loans instead of continuing to make payments on their mortgages.

Other borrowers discovered the system is moving at a snail’s pace, giving them more room to float by without making payments on mortgages. As banks struggled to catch up from 2010’s robo-signing-induced foreclosure moratorium, Cone says borrowers learned to gain a strategic advantage from the delays.

Cone writes that “armed with knowledge that the financial institutions are so far behind the eight ball playing catch-up with the delayed foreclosures, homeowners have no motivation to move on.” He added, “There are documented cases now of homeowners who are simply staying in their homes without making a mortgage payment for as long as three years, figuring they can stay until the bank gets around to foreclosing on them. In the meantime, they are living rent-free.”

There is a part of me that is happy for these homeowners.  After all the banks have their names on all the skyscrapers across every region in this country.  They are the owns that took advantage of the bailouts and are paid hefty dollars for essentially failing the American public.  Big banking and greed is the stem of all the corporate corruption and class warfare right?  No that is not right.  Nor should we be happy for these homeowners.

It is one thing to default on your home when you have lost your job, your income, fallen on hard times, family issues or health dilemmas.  But when a borrower is clearly able to make his/her mortgage payment and is strategically defaulting due to the underlying value which has been cut by 20-30% there is something fundamentally wrong and disturbing about this.  It reminds me oh so much of the borrower who racks up large sums of credit card debt knowing that they are planning on filing a Bankruptcy in the coming year.

The issue is distinguishing the real defaults from the “fake” ones and how do we really punish these borrowers who are seemingly just taking advantage of “the system”.

The inability of the lending institutions to foreclose in a quick efficient matter is not our faults.  However when we as a people decide to take the easy way out and only subject all other tax payers to the burden of resolving these issues it is our fault.  Whether it is the abuse of the bankruptcy code, strategic defaults or the some other facility for borrowers to put the rest of us in fiscal danger it is wrong and there should be some form of accountability.

It is easy to just laugh it off and say good job for person x, they really stuck it to B of A or Citi, etc. But the costs to these defaults will clearly come back on all of us.  Whether it is higher lending costs, more debt burden per home via government bailouts of FHA and/or Freddie or further stimulus in order to attempt to get rid of the never ending list of vacant and foreclosed homes.

If you are contemplating such a default keep in mind that your creditor may be more aggressive in terms of chasing a deficiency judgment.  There are many other options including signing a Deed in Lieu of Foreclosure or perhaps selling your home via a short sale.  I am not saying either will make you better off but certainly consult with a certified public accountant before making a major decision.

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